Performance review
Revenue for 2023 and adjusted net profit fell short of market expectations, China Oriental Education announced 2023 results: revenue of 3.98 billion yuan, up 4% year on year, slightly lower than the agreed market expectations; adjusted net profit to mother was 281 million yuan, up 5% year on year, lower than market expectations by 34%, mainly because teachers' salaries exceeded expectations. The company announced year-end 2023 dividends of HK$0.2 per share (total HK$436 million), corresponding to a dividend yield of 145% and a dividend yield of 8% (as of today's close).
Development trends
Revenue returned to growth as enrollment was repaired. By the end of 2023, the company had 255 schools and centers (+1 year on year), and the number of new students enrolled increased 13.8% year on year (average number of trainees increased 2.9% year on year). In 2023, see by section: 1) Cooking: New Oriental cooking income/number of new students -1%/+14% year over year, Omic income/number of new students +12%/+23% year over year. We expect the restaurant chain rate to increase or increase the degree of dependence of enterprises on school-trained chefs; 2) Automobile: Wantong Auto's revenue/number of new students enrolled +17.8%/+18.5%; according to management, the company's automotive specialty has expanded from a single sector to general fields such as transportation, large mechanical electronics, intelligent manufacturing, etc., and the number of related students accounts for 40% of the automotive sector; 3) IT: Xinhua computer revenue/number of new students enrolled is -5%/+1.5%. The reason why its performance is weaker than other sectors is due to a decrease in general IT demand under macroeconomic headwinds; 4) Europe and the US Manti Earnings/New Enrollment The number of students was +43/ +21%; management said that enrollment in related majors is very popular. Chengdu Beauty School has already achieved profit in 2023, and plans to establish 3-4 new beauty schools every year in the future. Management's performance will be shared. The late Spring Festival in 2024 led to a sharp year-on-year reduction in the spring recruitment cycle. Up to now, the company's lunar spring recruitment has driven a 10% year-on-year increase in revenue; the 2024 revenue is expected to increase 10% year-on-year.
Gross margin is under pressure, and cost reduction and fee control are being promoted to guarantee the release of profits. The gross profit margin in 2023 was 48.0%, a year-on-year decrease of 1.6 ppt, and salaries and benefits for faculty and staff in major departments increased sharply. By brand, gross margin of New Oriental declined year on year; gross margin of Omic and Delicious Academy improved year on year; gross margin of both Xinhua Computer and Huaxin Zhiyuan declined year on year; and Yantong's gross margin improved slightly year on year. The adjusted net interest rate for 2023 was 7.1%, an improvement of 0.1ppt year over year. Management said that the average customer acquisition cost for 2023 students decreased by 2-3%, and the company will continue to strengthen the control of personnel costs and sales expenses in 2024. At the college level, according to management performance sharing, the company has managed to shut down/merge and manage 35 schools since the epidemic, causing a cumulative loss of about 50 million yuan. This year, the company will focus on examining the profit level of individual schools. Online enrollment investment is expected to decline year on year, and adjusted net profit is expected to increase 40-50% year over year to 400 million yuan.
Profit forecasting and valuation
Taking into account enrollment uncertainty and rigid costs and expenses under macroeconomic headwinds, the 2024 revenue/adjusted net profit to mother was lowered by 9%/51% to $43.4/369 million yuan; a 2025 revenue/adjusted net profit forecast of $46.3/389 million yuan was introduced. Maintaining the outperforming industry rating; reducing the target price by 13% to HK$3.5 (based on 3.0 times 2024e adjusted EV/EBITDA). The current stock price is trading at 2.1 times 2024e adjusted EV/Ebitda, corresponding to 46% upside.
risks
Competition intensifies; the impact of the pandemic continues; enrollment falls short of expectations.